Sinclair, Inc. Q2 FY2020 Earnings Call

Greetings and welcome to the Sinclair Broadcast Group Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Lucy Rutishauser, Executive Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Operator. Participating on the call with me today are Chris Ripley, President and CEO; Rob Weisbord, President of Broadcast and Chief Advertising Revenue Officer; and Billy Chambers, COO and CFO of Local Sports. Before we begin, Billie Jo McIntire will make our forward-looking statement disclaimer.

Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors. Such factors have been set forth in the company’s most recent reports as filed with the SEC and included in our second quarter earnings release. The company undertakes no obligation to update these forward-looking statements. The company uses its website as a key source of company information, which can be accessed at www.sbgi.net. In accordance with Regulation FD, this call is being made available to the public. A webcast replay will be available on our website and will remain available until our next quarterly earnings release. Included on the call will be a discussion of non-GAAP financial measures, specifically adjusted EBITDA, adjusted free cash flow, and leverage. The company considers adjusted EBITDA to be an indicator of the operating performance of these assets. The company also believes that adjusted EBITDA is frequently used by industry analysts, investors, and lenders as a measure of evaluation. These measures are not formulated in accordance with GAAP, are not meant to replace GAAP measurements, and may differ from other companies' uses or formulations. The company does not provide reconciliations on a forward-looking basis. Further discussions and reconciliations of the company's non-GAAP financial measures to comparable financial measures can be found on its website, www.sbgi.net. Chris Ripley will now take you through our operating highlights.

Thank you. Like many of you, we eagerly await discussing the state of the company without the backdrop of COVID-19. These past five months have certainly been challenging for the country, the economy, the industry, and us as we face the pandemic’s impact on businesses and consumers alike. First, I want to say how very proud I am of our employees who have done a tremendous job of adapting quickly to a new way of doing business. It is through their hard work and perseverance that we've been able to operate our business seamlessly without sacrificing the quality that defines our company. We are already identifying learnings that we can take away from this period of time that can make us a stronger company going forward. With regard to the second quarter trends, as we move through the quarter, we did begin to see signs of improvement in the advertising market just as we anticipated and guided on our last call. After a very challenging April in which core advertising for our broadcast and other segments declined 43% year-over-year, June improved to a 26% decline, resulting in second-quarter core advertising performance for those segments being down 36% and in the middle of our guidance range. Our decision to provide second-quarter guidance on the May call was driven by our commitment to be as transparent as possible while also acknowledging the limitations that giving guidance for the entire year was impractical due to the wide range of variants that could result from uncertainties surrounding timing, pace, and magnitude of recovery. While we are still faced with many of those same challenges and changing dynamics around the effects of the pandemic make forecasting more difficult than usual, we have decided to once again provide guidance for the upcoming quarter. As a reminder, we are starting to enter the peak political season, which is still expected to be a record political year and will help mitigate the weakness in the core advertising space. We are pleased with the professional sports leagues that have resumed their schedules, although they are shortened. It is very clear that viewers are excited as well, with ratings for the first day of the MLB season up 32% compared to last year’s opening day viewership. As we discussed previously, our contracts with the sports teams already contemplate scenarios where there may be a shortfall in the number of live events being delivered to us. And in such cases, we are entitled to remuneration from the teams for any games falling short of the guarantees defined in the contracts. Moreover, we have distributors with whom we guarantee minimum games of live events in contracts with us. I'll leave it to Lucy to explain some of the ramifications of the timing and impact of rebates due to and from Sinclair as a result of the shortened 2020 season. I want to emphasize that contrary to reports circulating in the public domain at this time, we do not expect rebates from the teams to be greater than what we pay out to distributors. Given the differences in the way rebates are calculated in the team versus distributor contracts and other variances in the contracts. Speaking of our sports business, there are a lot of exciting things going on behind the scenes in Sinclair. As we announced several weeks ago, we hired Steve Rosenberg, a highly accomplished broadcasting and programming executive, as President of local sports. Steve, along with Billy Chambers, who is the local sports COO and CFO, will report to Rob Weisbord and help fill the void left by the upcoming departure of Jeff Krolik, who is retiring as the Head of our RSN business at the end of this month. I want to personally thank Jeff for all his assistance and hard work in helping integrate the RSN into Sinclair. He has been a valuable resource to me and the rest of the company, and we all wish him well in his future endeavors. A few words about Steve, for over 25 years, Steve has been a dynamic force in broadcasting, excelling in a number of sales, marketing, distribution, and executive management roles. During his career, Steve has been a true pioneer of innovative and creative sales, marketing, and programming efforts. Steve will play a key role in growing our sports business. His ability to challenge the status quo and bring about innovative ways to monetize opportunities will be fully utilized by Sinclair. One of his first priorities will be to use his programming expertise to help elevate our non-game programming on the RSN and our Stadium network. The majority of the programming hours on these networks do not involve live games, so there’s a significant opportunity to improve our viewership and revenue-generating capabilities during these time periods. I also want to mention that Scott Shapiro has taken on an additional role as Chief Strategy Officer of Sports and will focus on some of our larger growth opportunities associated with legalized sports betting. We have other exciting developments in our sports business coming up as well, with several significant growth opportunities on the horizon. As consumer viewing habits continue to evolve, we are committed to giving them an exceptional experience when and where they choose to watch us. We expect the sports app that is in development will provide viewers with an experience unlike anything they have encountered in the past, featuring enhanced graphics and sound, as well as the ability to interact with the content in numerous ways, including with advertisers and free-to-play games. We spend a lot of time meeting with many of the major players in sports betting, and we expect to be able to more fully detail our plans in this area later this year. As the exclusive provider of local sports content for more than half of the MLB, NBA, and NHL teams, we believe we are in a unique position to monetize the significant sports betting opportunities that exist. Other highlights in the quarter include NEXTGEN TV launches in multiple markets, including Las Vegas, Nashville, Pittsburgh, Salt Lake City, and Portland, Oregon, with another 10 or so Sinclair markets targeted by the end of the year. It is exciting to see this groundbreaking technology in action. There has been a great deal of effort within Sinclair for many years to create and bring this technology, the future of broadcast TV, to the marketplace. Its impact, however, will be felt far beyond traditional broadcasting applications. NEXTGEN TV will deliver a significant enhancement to television broadcast quality, but that just scratches the surface. The new platform gives broadcasters significant flexibility in using their broadcast spectrum. For starters, it dramatically increases spectrum capacity, allowing for more channels and targeted content to be sent over the existing spectrum band. Those signals will reach deep into buildings, moving vehicles, and eventually people's phones, opening up a wealth of opportunities for applications, diverse targeted advertising, data delivery, premium content, or sending advance emergency information – all in a mobile and portable manner. The signals also have interoperability with the Internet, including 5G, creating even more ways to satisfy consumer needs and monetize new technology. I applaud all of our employees who were involved over the many years to make this game-changing technology a reality. In July, we came to terms with Comcast to renew distribution rights for all of our businesses, including our broadcast stations, Tennis Channel, the RSN, and YES, as well as a full launch of Marquee in time for the Cubs' first game of the season. The narrative circulating has been regarding fears around completing the deal with Comcast or that terms would be unfavorable to some players, or that our broadcast stations would be dragged down by the RSN, which was just incorrect. As we've said, we were confident that we would reach an agreement with Comcast that was positive for us, and we are happy with the outcome in all regards. This agreement is another example of the benefits that come from negotiating for a large, diverse set of very popular programming assets in this business, and it is an undeniable affirmation of the importance of local news and sports, which consistently receive high ratings and are highly valued by distributors and subscribers. It is also important to note that our deal not only includes the launch of Marquee but expanded viewing coverage of the new RSN beyond where the Cubs' RSN was previously carried. This is something Comcast does not do for its own RSN in the Chicago area and didn’t even in the past when the RSN included the Cubs. This was accomplished without giving up carriage of other assets in our portfolio and while still achieving what we believe are favorable rates throughout our portfolio. With the completion of the Comcast agreement, we have now locked up almost 85% of the RSN’s total subscribers for at least two years and beyond. Also during the quarter, we agreed to a multiyear renewal for eight stations with ViacomCBS and, on the sports side, we have an agreement in principle with one team that expired at the end of last season. In June, we announced we would be launching a new headline news service in early 2021 focused on breaking news stories as they develop and sourcing them from our comprehensive local news resources. Think of it as breaking meaningful local news stories on a national level. In its initial phase, the new service is expected to be launched on approximately 50 of our CW and MyTV network affiliates and will be broadcast from 6 AM to 9 AM each weekday as well as on our free ad-supported app store. On the community front, we awarded our annual broadcast diversity scholarships to 10 talented students who are pursuing a career in the broadcast industry. In July, we launched a new campaign with the American Red Cross for urgently needed blood donations, utilizing our news production resources to create messaging and awareness of the urgency and to encourage viewers to donate blood. The campaign run was committed to on June 30, with the campaign continuing through mid-August. Finally, I want to address the initiatives around our capital structure that we continue to evaluate and act upon. We continue to believe our securities are significantly undervalued. This belief is reflected in our actions, including the continued purchase of our equity during the quarter. Since February of this year and through to date, we have repurchased approximately 19 million shares, representing 21% of the total outstanding shares as of the beginning of the year. While our proposed exchange of Diamond’s unsecured notes resulted in lower participation than we expected, we believe the lenders' decision not to exchange indicates their belief in the long-term positive value of Diamond. As I indicated previously, we continue to engage with financial institutions on ways to optimize our capital structure, deleverage, and lower our cost of capital. Now, I'll turn it over to Lucy to discuss our financial performance.

Thank you, Chris. First off, I want to echo Chris's appreciation of all of our employees who have done a terrific job of navigating the current environment and enabling us to perform at a high level as a company. Keep in mind that the inclusion of the Sports segment this year, which was not included in last year's first eight-month numbers, is responsible for many of the larger changes in our actual results versus the same period last year. Therefore, in many cases, I will be speaking about results versus prior year pro forma, which is a much more meaningful comparison and assumes we owned the RSNs during those periods. Before getting into the results, let me walk you through the accounting for the distributor and team rebates and the sports rights amortization as a result of the fewer professional games played. Pursuant to GAAP, we are required to accrue the total estimated rebate amount owed to the distributors across Q2 through Q4 of this year, which will reduce distribution revenue in each quarter. The cash outlay to the distributors, however, is not expected to occur until after 2020. On the team side, the rebate associated with the overpayment for the fewer games to be played in this season is expected to be realized partially in the third quarter, with the majority occurring in the fourth quarter as lower sports rights payments. Therefore, adjusted EBITDA for the year is expected to reflect both the team rebates to us and our rebates to the distributors. As Chris mentioned, we do expect rebates from the teams to be greater than what we pay out to the distributors. However, there will be timing implications regarding cash flow, with us realizing the benefits from the lower sports rights payments this year ahead of the distributor rebates being made after 2020. Sports rights amortization, which is included in the media and programming production expense line and is non-cash, does not factor into the calculation of adjusted EBITDA and gets recognized over the applicable sports season. So, in the second quarter, there were no professional games played, and therefore, sports rights amortization was minimal. We expect sports rights amortization for the third quarter to increase, nearing the high level of sports games currently scheduled in the period. For the fourth quarter, sports rights amortization is expected to be much lower, with baseball's regular season likely completed and with NBA and NHL games for the 2021 season likely starting later in the quarter than normal. All right, turning to the consolidated company results. Consolidated media revenue for the second quarter increased $539 million due to the inclusion of the Local Sports segment, which was not present in last year’s second quarter results. On a pro forma basis, total media revenues of $1.260 billion were down versus last year’s second quarter media revenues of $1.710 billion due to several factors that we have previously discussed. Most notably, the weakness in the advertising market due to the pandemic, the absence of live sports, the associated accrual for the distributor rebates, and the absence of these carriage fees. As compared to guidance, media revenues came in below the range we provided on our last earnings call of $519 million. However, this is important: this is due to the $124 million of distributor rebates that we accrued during the quarter, which was not included in our guidance last quarter because at that time we didn't know how many games the leagues were going to schedule. So, if you exclude the accrued rebates, our revenue would have been within our guidance range. Media revenues of $669 million for our broadcast and other segments, which excludes the RSNs, were within our guidance range, with both advertising and distribution revenues coming in as expected. As Chris mentioned, the advertising market improved as we moved through the quarter. June ended with our broadcast and other segments declining 26% over the same period last year, which was a significant improvement over the 43% drop in April. July saw the improvement continue, finishing down 20% for the month. Even as the political season ramps up in the third quarter and is expected to displace other advertising categories, we still expect to finish the third quarter down 15% to 22% in core advertising, which represents an improvement over the second-quarter performance. Subscriber churn in the second quarter across all of our segments was 7% on a year-over-year basis, slightly higher than the trend over the past few quarters, but understandable given the impact of COVID-19 on the economy and the number of people who are unemployed in the country. Consolidated media operating expenses of $569 million were down 50% on a pro forma basis compared to last year's $1,139 million. This was due to the absence of live games, the lower sports rights amortization, and proactive cost controls. Our focus on managing our expenses during the quarter drove an $11 million positive variance to guidance. Adjusted EBITDA on a consolidated basis increased 31% to $254 million due to the inclusion of the Local Sports segment. On a pro forma basis, adjusted EBITDA declined $391 million, driven by a $330 million decline in the Local Sports segment and a $61 million decline at the Broadcast and Other segments. The Sports segment adjusted EBITDA of $110 million was down from last year's pro forma $440 million, which reflects the distributor rebate accrual, the absence of Dish in last year's numbers, and the impact of COVID on the number of games. It's important to keep in mind that unlike GAAP results for the Sports segment, which included minimal amortization due to no live sports being played, Local Sports adjusted EBITDA reflected the continuation of sports payments made during the quarter. So, to simplify, the sports segment results during the quarter reflect the accrual for the rebates to the distributors but no benefit from the expected rebates from the teams, which are expected in the second half of the year. Again, excluding the accrued rebate, we exceeded total company adjusted EBITDA due to additional cost controls at the Broadcast and Other segments. Consolidated adjusted free cash flow, excluding the non-recurring legal litigation, COVID, transaction, and regulatory items of $9 million, was $46 million. That’s $79 million below the lower end of our guidance, but again, excluding the rebate accrual, we slightly exceeded our guidance. For the first six months of 2020, adjusted free cash flow was $156 million, and using our estimated share count as of yesterday of approximately 79 million shares outstanding, that results in free cash flow per share of $2.11 in the six-month period. Diluted earnings per share on 81 million weighted average common shares at June 30th was $3.12 in the quarter or $3.21 when adjusted for non-recurring items. Our liquidity position in both credit silos is strong, with neither silo’s revolver drawn and both silos having ample cash on hand. During the quarter, we launched an exchange for all of the outstanding Diamond 6.625% senior notes. $66 million of the aggregate principal amount, or approximately 4% of the outstanding issue, was exchanged for $31 million of new 12.75% notes and cash payments of approximately $10 million. In total, the transaction reduced our debt by $35 million. While we would have liked to have exchanged more of the bonds, the feedback we received was that the noteholders agreed with us that the bonds are undervalued and chose to hold on for future upside. As Chris said, that is a strong message for all holders of our capital structure. We continued our stock buyback program during the quarter, repurchasing over 5 million shares of our common stock at an average price of just over $16 per share. So far, for the third quarter to date, we have repurchased over 4 million additional shares. Since the start of the year, 21% of the total shares outstanding and 29% of the float have been bought back. During the quarter, we continued to execute on our plan to reduce costs, with savings benefiting both the short term and the long term. We continue to scrutinize all spending, delaying or eliminating non-essential expenses, including open positions, medium promotional spending, G&A, and CapEx, in addition to variable expenses tied to fewer games and lower revenues. We are confident that we can manage a prolonged period of weakness by executing the identified opportunities as well as additional steps we could take if necessary. Turning to segment details for the broadcast and other segments. Media revenues decreased 7% versus the same period a year ago, as advertising revenue was significantly impacted by the pandemic. A 36% decline in core advertising revenue was partially offset by higher political revenue and an increase in distribution revenue. The Broadcast segment’s revenue also benefited from $25 million of management incentive fees paid by the Local Sports segment that was not in last year's Q2 results and gets eliminated in consolidation. We came in at the middle of our revenue guidance range and $12 million over the high end of our adjusted EBITDA guidance. For the Sports segment, media revenues of $616 million decreased 38% versus pro forma results of $992 million in the second quarter of last year. Much of the decline was expected and was due primarily to the absence of Dish, the lack of advertising revenues from postponed games, subscriber churn, and the accrued distributor rebates. Excluding the accrued rebate, we were very close to guidance. Media expenses in the second quarter were $106 million, an 84% decline from last year's pro forma $659 million. As explained, this is primarily the result of minimal sports rights amortization being booked in the quarter due to no professional games being played. As compared to guidance, media expenses were slightly higher as a result of higher-than-expected production programming expenses. Local Sports adjusted EBITDA of $110 million for the quarter was below pro forma results of $440 million last year and below our guidance range of $190 million to $202 million, again due to the distributor rebate accrual. If you exclude the rebate accrual, we would have exceeded our local sports adjusted EBITDA guidance. So, hopefully, you're seeing a trend here in relation to the distributor rebate accrual. If you back that out, we either met or exceeded all of our guidance in the second quarter. Now, turning to the consolidated balance sheet. The consolidated cash at the end of the quarter was $622 million, including $171 million at STG and $436 million at Diamond. Total debt at the end of the second quarter was $12.399 billion, and the net leverage ratio for consolidated Sinclair at quarter-end was 6.4 times. Sinclair Television Group's first-lien indebtedness ratio on a trailing eight quarters was 2.6 times on a covenant of 4.5, and 4.5 times on a net leverage basis through the bonds. Diamond's first-lien indebtedness ratio on a trailing four quarters was 6.5 times on a covenant of 6 in a quarter, which springs only if the revolver is drawn over 35%. On a total net leverage basis through the bonds, Diamond was levered 8.5 times. Regarding guidance, there is still much uncertainty around the resilience of the economy amid COVID’s impact. Our guidance will therefore be limited to the third quarter. Keep in mind that any change to the expected plans in the sports leagues could cause our reported Local Sports results to deviate meaningfully from our guidance. For our Broadcast and other segments, our third quarter media revenue guidance is $777 million to $805 million, which is up approximately 6% to 10% from last year's pro forma $733 million. This is driven by higher political and distribution revenue, which is partially offset by a projected 15% to 22% decline in core advertising. Adjusted EBITDA for the Broadcast and other segments is expected to be between $187 million and $211 million compared to $216 million pro forma last year. For the Sports segment, third quarter media revenue is expected to be $718 million to $727 million, down 15% to 16% from last year's pro forma $858 million. The projections include the impact from the distributor rebate accrual. Adjusted EBITDA is expected to be $402 million to $410 million as compared to $425 million pro forma last year, with the decline primarily due to the distributor rebate accrual, the absence of DISH carriage fees, and subscriber churn, offset by lower rights payments to the teams. I do want to point out that there is a sizable increase in GAAP media expenses in Q3, which results from MLB, NBA, and NHL sports rights amortization being recognized in the quarter, reflecting when the games will be played. While this increase is an expense on a GAAP basis, it is a non-cash item that does not impact adjusted EBITDA, which is based on sports rights payments, not rights amortization. As mentioned before, the sports rights payments reflect the offsetting benefit from the teams on the fewer games, with some of that partially reflected in Q3 and the majority in Q4. For the consolidated companies, third quarter media revenues are expected to range from $1,460 million to $1,497 million, with adjusted EBITDA of $589 million to $621 million, and adjusted free cash flow of $374 million to $411 million. Based on our current share count of approximately 74 million shares, this equates to free cash flow per share of approximately $5.05 to $5.55 in the third quarter. So, with that, I would like to open it up for questions.

Our first question is from Aaron Watts of Deutsche Bank. Please go ahead.

Thanks for having me on. I have a few questions I wanted to run through quickly. I guess first on the television station group. Encouraged to see the improvement month-to-month in core advertising. Are you seeing any fits and starts on that in your market that are experiencing some ebbs and flows of COVID cases? And also, are the bookings coming in a lot later relative to where you've tracked historically or at least in the prior year?

Yes. I'll handle that. This is Rob. We are not seeing fits and starts. It’s been pretty consistent. You're correct; it’s being booked a little bit later. We are holding onto it to see how COVID is affecting the different DMAs that we're in. However, we've been encouraged through our virtual training and virtual sales presentations that we've been able to communicate effectively in this new norm, and that’s where you’re seeing the positivity and the pace moving forward.

Okay. And in terms of bookings coming in later?

No, the bookings are coming in later.

Okay. And then as best as you have clarity on today, can you give us the latest on the stability of the underlying subscriber base for your station group and the RSNs? And has your near-term, medium-term outlook for cord-cutting changed at all based on what you're seeing right now?

Yes. I'll take that one. So, Aaron, as I mentioned, we saw across all the platforms, subscriber churn year-over-year is down about 7%. Again, that’s really coming from one primary MVPD. But what you’re going to see in our guidance for Q3 is that we have pretty much mirrored that level of churn, and that's really based on some of the public commentary from the distributors themselves recently as well as just not having a lot of visibility as to what's going to happen with the churn. As we talked about, there are two schools of thought out there: one is that people are currently churning due to the status of their employment and the economy, but on the other hand, you do have government assistance for those people. You also have the fact that TV is really the only form of entertainment that's out there right now. Especially with fans not being able to attend games, to watch their favorite local team, they would need to see those on the RSN. So, there are two divergent views here. I really don't know where it ends up. To be conservative, we have forecasted our Q3 to near the Q2 levels.

And then just a couple of questions for me on the Diamond Sports side. With the Comcast renewal now inked, I assume you have a pretty large percentage of your distribution locked up over the next few years. Is that a fair statement? Do you have a percentage that you could give us of kind of what is locked in now and for how long?

Sure. 85% of the RSN subscribers are locked in for two years or more.

Perfect. And, Lucy, I just want to make sure I was clear on your comments and I appreciate all the color around the rebate and the refund from the teams. If I'm just specifically thinking about cash-in, cash-out, to be clear, when do you expect kind of cash in from the teams in terms of the rebates there? And I think you said the cash-out to the MVPDs will happen next year. Am I hearing that right or thinking about that right?

Yes. So contractually with the distributors, because of the measurement periods, the cash-out would occur after 2020. Each contract is different. So, I'm not going to go into the specifics after that. But the rebates and the overpayments to the teams all occur this year—some in Q3, but the majority really in Q4 once we get through the full season.

And in the end, those cash-ins, cash-outs, obviously, differences in timing, but you're saying that those should be relatively equal or the rebates from the teams to you should be greater than what you have to pay out to the MVPDs?

Yes. What I’m indicating is that the amount we get in will be greater than the amount we pay out, and that’s really because of the variability, the differences in how the minimum games are all calculated from one contract to the next.

Okay. Perfect. And last one for me...

Aaron, just to be clear...

Yes.

Aaron, just to be clear, because again there's a lot of misinformation on the street regarding this, people modeling that Diamond is going to pay more than what they bring in. As Chris said, that’s just incorrect. We expect to bring in more than what we will pay out because of the differences in the calculations.

Okay. Perfect. I'm glad. Thank you for that clarity. Last one for me. And again, I appreciate the time. You repaid your revolver's outstanding balance. It sounds like you're comfortable with liquidity. How do you think about that liquidity now going forward as you look at where your bonds are currently trading? I don't think I heard anything about more bond buybacks this quarter. I know you also still have preferred stock outstanding. How do you weigh the order of importance of tackling those different opportunities? And that's it. Thank you.

Sure, Aaron. Look, we have, you know, our first and foremost right is our priority to continue to grow Diamond, right, whether it’s through acquisitions and investments in growth opportunities. But we are also committed to strengthening the capital table, lowering our cost of capital, and deleveraging. So, as we've previously discussed on other calls, we will continue to look for ways to deploy cash and optimize the capital structure. Everything is on the table right now. We're evaluating a lot of factors, so it could range from redeeming the preferred stock, additional debt exchanges, receivable financings, designating subsidiaries as unrestricted, as well as looking at new acquisition opportunities, and again, investing in all the growth opportunities—this is the primary reason why we bought Diamond. So, all of these possibilities are being considered.

Our next question is coming from Dan Kurnos of Benchmark Company. Please go ahead.

Good morning and appreciate all the color, everyone. Just so we’re I guess maybe all clear in terms of some more granularity just around Comcast and Marquee. Just, you know, Lucy, thanks for the color around subs; that helps solve part of the equation. Just trying to understand sort of the timing of when Marquee with it all just won the Comcast deal was done. I'm just trying to sort of understand the distribution Delta from 2Q to 3Q on the RSN side or if there is some other rebate nuance that we might be missing. And then on the core side, maybe Rob, you just give us some more color on the category improvement and sort of where you're seeing particular pockets of strength and what gives you the confidence that we kind of continue to sequentially improve throughout the year. Thanks.

Okay, Dan. I'll speak to Comcast, and Rob will speak to the core question. In terms of changes, not much changed with Comcast at all. They continue to carry all of the agreements to carry all the Tennis Channel, our broadcast stations. The only real change was Marquee, and they picked up Marquee the moment they signed the agreement. As I noted in the prepared remarks, Marquee ended up getting into new geographies that the Cubs were not previously distributed on, so we were very happy with that outcome.

And Dan, let me just answer your question on the dollars. So with the distributor rebate accrued in Q2 raised. We said that'll hit Q2, Q3, and Q4. So, you are seeing that delta. Additionally, remember that the RSN contract doesn't actually come up until the end of the quarter; that’s when it expires. So, you would not see the Comcast impact in Q3 numbers.

Just a side note there for clarification—while the RSN contract was renewed early and it doesn't actually expire until the end of September, we did this all as one deal, and everything will be coterminous on the other side.

Rob, before you answer, just Chris, just on that—is that on the TV side then that's pushed back to the RSN start date now? Because I think that's a bit of nuance that might be there.

No, actually, the TV side goes alongside the RSN expiration. Sure, yeah. On the core side, we continue to see services perform well. We have pharmaceutical that has joined the mix, and we’re seeing the education category pick up as well. We expect improvements toward the end of the third quarter going into the fourth quarter, especially with auto beginning to recover as they've addressed supply chain issues and reopened plants. So, we’ve become less reliant on the auto business to drive our revenue, and as in the past, we've transitioned from being generalists to specialists, which continues to lead to better performance.

That's helpful. And Chris, I apologize if I missed this, but did you give us an update on where you're at with DTC?

No, we haven't. That was not in my remarks. There’s a lot of work going on in DTC right now. It’s definitely going to be an important part of the future for the RSN, tennis, and broadcast. At this point, it’s too early to provide specific guidance, but we are busy adding that feature to our new digital reboot that will launch next year and will be complementary to the MVPD product we have today.

Our next question is coming from Davis Hebert of Wells Fargo. Please go ahead.

I want to ask on the current accruals and the rebates. I understand, I think, the cash flow piece. How firm are those rebate levels? I mean, to the extent MLB stops and starts, or perhaps further underdelivers on those live games?

Yes. So, the numbers could certainly change if the number of games changes, and it’s really just a mathematical calculation, with the sort of hedged nature of our contracts would continue to apply as the games continue to shrink.

But would it be fair to say that if there are a few underdelivered, it’s not going to be material to what you've already accrued for?

So, it shouldn't be material to our actual EBITDA at the end of the day, but it could certainly increase the amount of rebates from the teams and the amount of rebates to the MVPDs.

And then on the team payment side, is all that getting taken care of this year? Or have you had negotiations with the teams to perhaps smooth that out over a longer period of time, or are there other negotiations going on?

It should all happen this year. To the extent some teams, you know, have issues from a cash flow perspective, we'll have to see, but no indication of that so far. What we've been doing is essentially withholding current payments right now to chip away at the balance.

Thank you. And then Lucy, you mentioned a lot of different liability management possibilities. I was wondering if a tender offer perhaps would be in the conversations indexed to capture discount in Diamond sports bonds. Just thinking you'll be sitting on a decent amount of cash after political, maybe that's a win-win versus an exchange. Just curious about your thoughts on something like that?

Well, the political revenues really belong to STG, and again, we've stated in the past that each silo would be self-funded. So, STG’s political revenue is primarily directed toward shareholder returns, whether it's in dividends or share repurchases. Diamond’s cash flow is there to fund Diamond. So, we wouldn't look to pull STG’s cash over to Diamond for that, but again, when you're talking about the substantial debt that Diamond has outstanding, anything we do would likely be a larger-type transaction.

And then my last question is, I believe you have a year to rebrand the RSNs. Just curious about the timing on that or if you got a reprieve with the COVID-19 situation?

We hadn’t spent more than a year on that. The new name will be announced and released early next year.

Our next question is from Steven Cahall of Wells Fargo. Please go ahead.

Yes. Thanks. So, maybe if we've learned one thing about the RSN business, it's just that the earnings power may be a little lower and so the debt level that you originally decided was appropriate might be a little too high. And Davis asked, and we've talked a little bit about ways to renegotiate that debt level down. It's just a substantial overhang on what's otherwise a really good TV broadcast business. So, if you kind of step back, how do you really think about steps that you can take to remove that overhang from the debt on the RSN business, so that you can capture more of the fair value in the TV business?

Well, as we mentioned, we're busy looking at several alternatives to deleverage Diamond. We think there are many options available. We've stated this multiple times: we see these entities as independent and self-lending. There’s no reason for value or cash to flow from one silo to the other. When looking at our valuation, it should be conducted on a sum-of-the-parts basis.

And, Steve, look, what I would add is I think people are missing the investment thesis regarding why we bought the RSNs in the first place. As we look ahead, you've got to include all the growth opportunities and synergies, which again is the reason we purchased the RSNs—we value the business. It is lucrative. Are we encountering elevated leverage in the near term? Yes, but that's likely true for just about any company in the U.S. today due to COVID. This elevated leverage will take a bit longer to decrease to our target level. However, we're focused on getting back to our target leverage, and part of how we plan to achieve that is through the numerous growth opportunities, whether it be production programming, synergies, cross-promotion, digital opportunities, legalized sports betting, rebranding, and selling all our digital impressions. There’s so much potential that we haven't started to tap into with Diamond.

And then maybe just on the retrans side, you've done some recent station renewals with Viacom and CBS, and with Comcast as you pointed out. Do you feel like you have the ability to provide either a qualitative or quantitative outlook on net retrans growth for 2020? Thanks.

As you know, we do not have full-year guidance on the table. So, at this point, we're not ready to put that out there. As I said, there's a lot of variability in what's happening in the pay-TV universe—a factor that would influence that. So, at this point, no full-year guidance.

Our next question is coming from John Janedis of Wolfe Research. Please go ahead.

I’ll be brief. One is a follow-up on the ad side. With the various ways COVID has affected the portfolio, what impact are you seeing or do you expect to see on back-to-school spending, and is that typically a swing factor? Also, separately, given that we are heading towards a political cycle, do you see a Democratic sweep in the fall, and how does that change the regulatory landscape and any potential progress for your businesses? Thank you.

Okay, go ahead. Sorry.

No, no. I was just mentioning that it's worth noting that broadcasting has significant support on both sides of the aisle. You saw that with letters from a considerable number of both Democrats and Republicans supporting local media, emphasizing its vital role in the communities we serve. So, we feel as if the industry is in good shape with bipartisan support. Therefore, we're not concerned about a change in administration. The notion of re-regulating broadcasting would be akin to picking on the little guy. I do think some of the larger companies like ViacomCBS will see more regulations in the future, but our industry is small and fragmented, making it unlikely.

If I could just ask one more. Just follow up on Comcast, and maybe a bit more broadly, as you mentioned, the market has been negative on RSNs. Can you provide us with an update on how you're viewing the landscape? Obviously, you've talked about 85% of the subs being locked in, but have distributors in that space taken a harder look at your business? Any changes in hiring or anything else to highlight?

Sure. In all of our negotiations, we've essentially found a status quo environment in terms of terms, tiering, pricing, and all the various elements that go into a distribution agreement. We’ve successfully cycled through all the major and small MVPDs. Save for one, DISH, we found what we expected, which is that this content is extremely valuable to the distributors as it drives subscriptions, and we achieved what we set out to achieve: status quo renewals.

Thank you. At this time, I'd like to turn the floor back over to Mr. Ripley, President and CEO, for closing comments.

Thank you. I would like to conclude by thanking all our employees, customers, and stakeholders for their patience during this unprecedented time. We are confident that the actions we are taking are not only helping us manage the challenges in the short term but are also positioning the company for continued success in the future. Thank you for participating on our earnings call this morning. If anyone has any additional questions, please feel free to contact us.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.